THE EAST AFRICAN SUB-REGIONAL WORKSHOP ON “ INTERGRATING FINANCIAL SERVICES INTO POVERTY REDUCTION STRATEGIES” DAR ES SA

1. THE EAST AFRICAN SUB-REGIONAL WORKSHOP ON “ INTERGRATING FINANCIAL SERVICES INTO POVERTY REDUCTION STRATEGIES” DAR ES SALAAM, TANZANIA Date: 28th –30th June 2006

2. Theme:Integrating financial services into poverty reduction strategies ~ the case of sierra leone

3. PRESENTATION BY EDMOND. O. KANGAJU COORDINATOR COMMUNITY BANKS BANK OF SIERRA LEONE 28TH – 30TH JUNE 2006

4. I. BACKGROUND • Like most sub Saharan African countries, Sierra Leone is a developing economy with a per capita income of US$520 • Its population is estimated at 4.9 million of which about two-thirds reside in the rural areas. • The country is endowed with abundant natural resources including extensive mineral deposits, vast landmass for agriculture and rich marine resources • The country has just emerged from a civil conflict which lasted over 10 years, and which has exacerbated the socio-economic situation

5. Background (Cont.) • The civil conflict was officially declared over in January 2002 • Post-conflict era has witnessed significant strides in the consolidation of peace and the rehabilitation of the country’s infrastructure: • Truth and Reconciliation Commission reported its findings in June 2004. • Special Court currently prosecuting war criminals On the economic front: • Enhanced HIPC Initiative - decision point in March 2002. The country is expected to reach Completion Point in June 2006 • Prudent monetary and fiscal policies • Sustained and robust real GDP growth.

6. Background (Cont.) Selected Economic and Financial Indicators

7. II. Poverty Profile • 70 percent of Sierra Leoneans (3.5 million persons) live in poverty • Ranked 177th out of 177 countries – UNDP Human Development Report 2004

8. Poverty Profile (Cont.) Distribution of Poverty by Area Source: Poverty Reduction Strategy Paper, March 2005 • 73 percent of all poverty in Sierra Leone is in rural areas • The rural poverty gap - the extra income required to reach the poverty line - is 34 percent • Poverty most severe in the rural areas, underlining the need to extend financial services to these areas.

9. III. Poverty Reduction Strategies • Strategies Following conclusion of civil conflict, government embarked on programme to consolidate peace and reduce poverty The Government’s efforts were reflected in: (i) Interim Poverty Reduction Strategy Paper (IPRSP) (June 2001) – programme to restore national security and good governance, re-launch the economy and provide basic social services to the most vulnerable groups (ii) National Recovery Strategy (NRS) (October 2002) – based on detailed district assessments and local recovery plans, it aimed at improving the provision of social and economic services in the immediate post-conflict period.

10. Impacts of the IPRSP and the NRS • Both the IPRSP and the NRS successfully implemented during the period 2001 – 2004 • Considerable progress in restoring security and consolidating peace throughout the country • Conclusion of the disarmament and demobilisation programme in 2002 • Ex-combatants were reintegrated and virtually all IDPs and refugees resettled. • The entire country is now accessible to Government and development partners • Sustained economic recovery - Real GDP 18.2 percent in 2001 from 3.8 percent in 2000. 27.5 percent in 2002 and 9.3 percent in 2003. Poverty Reduction Strategies (Cont.)

11. Poverty Reduction Strategies (Cont.) PRSP – Launched in February 2005 as part of the wider programme to achieve the MDGs • a series of extensive consultations conducted throughout the country involving key stakeholders • It classifies measures designed to reduce poverty into three pillars, each with objectives closely tied to the MDGs.

12. Poverty Reduction Strategies (Cont.) Pillar I: Promoting good governance, security and peace • Emphasis on the need for deeper reforms and capacity strengthening for effective and efficient delivery of basic services and long-term sustainable development. • key elements include: i) public service reform ii) decentralization of services delivery; iii) improvements in public financial management; iv) strengthening the anti-corruption agenda; v) reforming the judicial system, and vi) tackling human rights abuses.

13. Poverty Reduction Strategies (Cont.) • Pillar II: Pro-poor sustainable growth for Food Security and Job Creation • emphasizes the continued implementation of sound economic policies to attain macroeconomic stability and a more favourable environment for private sector development • key elements include: i) macroeconomic stability –appropriate fiscal and monetary policies and effective debt management, ii) support to the productive sectors; iii) investment in infrastructure for power, roads and information technology; iv) improvements in the investment climate for private sector development - appropriate legal framework and better access to credit and micro-finance programmes; and v) divestiture and reform of public enterprises.

14. Poverty Reduction Strategies (Cont.) Pillar III: Human Resource Development • underscores the point that the basis for sustained poverty reduction is built by enhancing the capacities of the poor and reducing their vulnerability • Key Elements - i) the decentralization of many services; ii) construction and rehabilitation of facilities; iii) well targeted subsidies iv) school feeding programmes; v) improved curricula; vi) training for teachers and health workers, and vii) better administration including improved statistics for monitoring educational enrolment rates and health outcomes.

15. Poverty Reduction Strategies (Cont.) Implementation of the full PRSP is yet to commence as the institutional structures are still being established and the requisite funding for the programme is being sourced. Challenges • Consolidation of peace –transformation of the security sector as UNAMSIL withdraws • Human and institutional capacity building • Funding for the implementation of the programme –Financing requirement - US$ 1.7 billion • Increasing fiscal pressure – provision of basic services and significant infrastructural development needs

16. IV. Sierra Leone’s Financial System • The financial system comprises the formal sector and a sprawling informal financial sector. • It possesses all the features of a developing financial system: essentially incomplete, without the full complement of markets and institutions to cater for the financial needs of the economy. • Specialized institutions for providing finance for small and medium scale enterprises, and long-term finance for industrial and infrastructural projects are only now being established • Dominated by the commercial banking sector, which is oligopolistic. • The range of financial instruments is rather limited.

17. Sierra Leone’s Financial System (Cont.) (4)

18. Sierra Leone’s Financial System (Cont.) • Commercial banking operations are concentrated in the urban areas, especially the capital city, Freetown. - Out of 27 commercial banks head offices and branches in the country, 15 are located in Freetown and 12 in the provincial areas but mostly in urban settlements. • Greater proportion of investments in treasury securities, at the expense of on-lending to rural small-scale operators

19. V. POLICY AND LEGAL FRAMEWORK FOR FINANCIAL SECTOR DEEPENING • In 1992, Government embarked on a series of Financial Sector Reforms: - Liberalisation of interest rates - Elimination of directed credits and credit ceilings - Introduction of indirect market-based instruments of monetary management • In Year 2000, Bank of Sierra Leone Act and the Banking Act revised to meet emerging economic challenges

20. POLICY AND LEGAL FRAMEWORK FOR FINANCIAL SECTOR DEEPENING (Cont.) • In 2001, Other Financial Services Act – Strengthens the central bank’s regulatory and supervisory authority over non-bank financial institutions • In June 2005, Anti-Money Laundering Act - to assist in the fight against the global menace of money laundering and terrorism. • In 2002, National Microfinance Policy – aims “to develop and integrate microfinance into the broader financial system and facilitate the provision of viable and sustainable microfinance services to low income Sierra Leoneans in a transparent and accountable manner for meaningful productive activities and thereby contribute to economic growth and poverty reduction”.

21. POLICY AND LEGAL FRAMEWORK FOR FINANCIAL SECTOR DEEPENING (Cont.) • The Banking Act provides guidelines on licencing of financial institutions, minimum capital requirement and capital adequacy ratio reserve requirement Substantial progress accomplished in creating a favourable legal and policy environment for microfinance. However, specific prudential regulation and supervision need to be instituted to support the growth of the microfinance sector.

22. RURAL FINANCE AND ACCESS TO FINANCIAL SERVICES • Key Features • No. of financial institutions in the formal and semi-formal sectors is limited. The outreach to rural areas is also limited • Community banks have only operated for 2-3 years and their combined outreach is around 3,000-4,000 clients • Most of the loans of rural based financial institutions are for a duration of 4-6 months

23. RURAL FINANCE AND ACCESS TO FINANCIAL SERVICES (Cont.) • Most of the loans by Community Banks and MFIs are for petty traders, salary earners, and micro and small rural business. Only a few loans for agricultural purposes. • Savings mobilisation still very weak due to very low freely disposable incomes and the small number of institutions permitted to capture savings • The biggest demand of the rural poor is availability of a near-by bank with easy access to their money

24. RURAL FINANCE AND ACCESS TO FINANCIAL SERVICES (Cont.) • Community Banks are more accessible but very few in number • The poor usually need loans at short notice as business opportunities emerge from one day to another • Community banks are responsive to this need as they usually disburse loans within 1-2 weeks after receiving loan applications • Financial services or grassroots type financial institutions currently absent in the financial system of Sierra Leone . They are however a suitable type of village banking institutions for Sierra Leone

25. VI. Development of Microfinance OBJECTIVES i) integrate microfinance into the formal financial system; ii) facilitate provision of viable and sustainable microfinance services to low income households in a transparent and accountable manner so as to foster economic activity, boost real incomes and reduce poverty.

26. Development of Microfinance (Cont.) A schematic representation of micro-finance objectives and expected output/Outcome

27. Development of Microfinance (Cont.) • PROGRESS • Formulation of a National Microfinance Policy • Capacity building of national professionals, locally and internationally. • National Microfinance Management Institutional • Framework - aims to develop technical capacity in the • microfinance industry and identifying strategies geared • towards overcoming the microfinance demand/supply gap in the country.

28. Development of Microfinance (Cont.) • The Microfinance Coordinating Committee (MCC) is responsible for guiding and overseeing the further development of the microfinance policy and providing technical advice to the government on microfinance. • The Investment Committee is responsible for co-ordinating activities in the micro-finance sector in order to avoid duplication and over-subscription. The Investment Committee reports annually to the Micro-finance Co-ordinating Committee

29. Development of Microfinance (Cont.) • The Technical Service Provider (TSP) - overall responsibility for managing the nation’s microfinance programme of assistance by providing tailored, on the ground, technical assistance to selected MFIs and the BSL. • The TSP submits annual work plans and progress reports to the Investment Committee which will supervise their work. • Current TSP - The Microfinance Investment and Technical Assistance Facility (MITAF)

30. Development of Microfinance (Cont.) OUTREACH PERFORMANCE • combined loan clients tending towards twenty thousand (20,000) • current MFIs possess high quality portfolio, with a PaR at thirty (30) days of 0% or very close to 0%. • The MFIs have also demonstrated increasing capacity to report accurately on their portfolios, courtesy of partnerships created by MITAF aimed at instituting accurate information systems.

31. Development of Microfinance (Cont.) • After 2-3 years of their operations, the community Banks have emerged as solid financial institutions well managed by experienced managers and mostly adequately controlled and supervised by their boards • They lend mostly for short term activities not exceeding 6 months, which appears appropriate, giving their short-term resources • Their efforts have been geared at lending not investing their excess funds in commercial papers and treasury bills

32. Development of Microfinance (Cont.) Current MFIs Source: MITAF Sierra Leone *Segbwema started lending in April 2005 **average outstanding balance (not disbursed)

33. Development of Microfinance (Cont.) CHALLENGES • Funding required to expand and professionalize the microfinance sector • Absence of outright leaders to demonstrate the commercial viability of microfinance • Limited capacity of microfinance operators and support structures • Achievement of operational self-sufficiency by MFIs • Inadequate regulation aimed at integrating microfinance into the formal financial system

34. Development of Microfinance (Cont.) RECOMMENDATIONS FOR INTEGRATING FINANCIAL SERVICES INTO POVERTY REDUCTION STRATEGIES • Enhancing the involvement of commercial banks by conducting training of trainers for microfinance programs targetting particular their Senior Management Personnel. • Providing adequate technical assistance to Community Banks and MFIs to orient them in serving the poor and helping them to become true development oriented financial institutions.

35. Development of Microfinance (Cont.) • These requirements of the MFIs include: - training of Management and Staff - training of Board members - refinance facility to increase lending - assistance in product management - improvement on their MIS, through the introduction of software programmes for financial transactions and accounting - assistance in the setting up of an apex body

36. Development of Microfinance (Cont.) • Providing assistance (both financial and technical) to facilitate the introduction of Financial Services Association (FSAs) into the financial system • Encouraging collaboration and networking between the community Banks, MFIs and the FSAs. • Providing refinance facility for Community Banks, MFIs and FSAs to enhance their financial intermediation activities, in rural communities

37. Development of Microfinance (Cont.) • Instituting prudential regulation and supervision aimed at the microfinance sector • Providing technical assistance to facilitate an increase in the number of rural financial institutions, improvement of the services of existing rural and microfinance institutions and widening their outreach • Efforts to be made by government to incorporate cooperatives into its overall microfinance strategy • Organising linkage banking programme with NGOs as facilitators • Extending insurance service to the rural microfinance sector

38. THE END I THANK YOU for your attention!